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Wednesday, February 6, 2008

* The Winning Score - Part 1 of 2

In this week's celebration of winning and champions, I thought it would be appropriate to see what one of the NFL's most inspirational coaches had to say about winning:

If winning isn't everything, why do they keep score?
-- Vince Lombardi

There is a lot of truth in that statement. We live in a highly competitive world that extends well beyond the sports field. Employers are competing for the best employees so they can better compete for your business. A better business then allows them to compete in the financial markets for your investing dollars. As investors we pit one investment against another when deciding what to add to our portfolio and it shouldn't stop there. Once an investment makes it into your portfolio, it should continue to compete with other investments to keep its spot.

To compete you must keep score. One of the metrics that I use to score an individual stock's performance is Internal Rate of Return (IRR). The IRR is the discount rate that equates the present value of an investment's cash flow to its initial cost and subsequent investments and withdrawals. In simple terms, it is the interest rate you would need to earn to make the same money off of an interest bearing account assuming the same investment.

I have extracted out of my two massive financial spreadsheets a sample model from the portfolio tab that demonstrates how to calculate an IRR for an individual stock investment. Tomorrow I will post a link to the model and describe how to use it.

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